Republic of Korea Development of National Employment Policies through Two Economic Crises

 
Republic of Korea
Development of National Employment Policies
       through Two Economic Crises
          Lessons from Its Experiences
Republic of Korea
Development of National Employment
Policies through Two Economic Crises
        Lessons from Its Experiences

 INTERNATIONAL LABOUR OFFICE • GENEVA
Republic of Korea: Development of National Employment Policies through Two Economic Crises

Copyright © International Labour Organization 2012
First published 2012

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Republic of Korea: Development of National Employment Polices through Two Economic Crises: Lessons
from Its Experiences / International Labour Office, Employment Policy Department. – Geneva: ILO, 2012

ISBN: 978-92-2-126895-6 (print)
ISBN: 978-92-2-126896-3 (web pdf)

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iv
FOREWORD

This study on employment policies of the Republic of Korea during the two economic
crises, namely the Asian financial crisis of 1997 and the global economic crisis of 2008,
has been prepared with the support of the Employment Policy Department, ILO,
Geneva. This study is timely because the global economy has faced a downturn in
employment and an aggravation of social unrest under the prolonged recession
entailing the need for a renewed commitment to place jobs at the centre of economic
and social policies for both developed and developing economies. The study adds a
great deal of substance to the illustration offered on the Korean experience in the
World Development Report 2013 on the global theme of ‘jobs’.1

This analysis of employment policies in response to the global recession in the Republic
of Korea provides an opportunity to share its experience with countries in similar
economic and social situations. The purpose of the study is to (i) document
employment policies that the Republic of Korea implemented to cope with two
economic crises (1997 and 2008); (ii) extract policy lessons which could be useful to
other countries; and (iii) review the Republic of Korea’s experience from the standpoint
of ILO Convention on Employment Policy and Promotion (C.122) which requires each
member state to pursue an active employment policy as a major goal.

                                                                            Azita Berar Awad
                                                                                     Director
                                                                Employment Policy Department
                                                                                         ILO

1   World Bank (2013) World Development Report: Jobs, Washington DC, p.90

                                                                                           v
ACKNOWLEDGEMENT

This report on the Republic of Korea was prepared by Professor Joonmo Cho and
Byung-jin Ha. The study was coordinated and managed by Wang Kim under the
supervision of the Director of the Employment Policy Department, ILO Geneva, Azita
Berar Awad.

The report greatly benefited from guidance and comments of Iyanatul Islam, Chief of
the Country Employment Policy Unit, ILO, Geneva. The authors would like to thank in
particular Claire Harasty and Sangheon Lee (ILO Geneva) for comments on earlier
versions of this study. The standard disclaimer applies: the authors bear full
responsibility for any remaining errors and omissions.

                                                                                vii
CONTENTS

FOREWORD ....................................................................................................................................... v

ACKNOWLEDGEMENT ................................................................................................................ vii

CONTENTS ....................................................................................................................................... ix

ABBREVIATIONS .........................................................................................................................xiii

EXECUTIVE SUMMARY ............................................................................................................... xv

1. INTRODUCTION ....................................................................................................................... 1

2. TWO ECONOMIC CRISES AND LABOUR MARKET EVOLUTION ................................. 3

      2.1       Comparison of the two economic crises in magnitude and transmission
                mechanisms in Korea .............................................................................................................. 3

      2.2       Labour market impact of the economic crises in Korea ............................................ 7

      2.3       Economic crises and aggravation of pre-existing labour market
                problems in Korea .................................................................................................................. 12

3. EMPLOYMENT POLICY AND INSTITUTIONAL REFORM TOWARDS MORE
   ACTIVE MEASURE .................................................................................................................. 19

      3.1       Evolution of employment policies and intensified employment services ........ 19

      3.2       Employment policy response to youth .......................................................................... 27

      3.3       Employment policy response to non-regular workers ............................................ 33

                                                                                                                                                    ix
Republic of Korea: Development of National Employment Policies through Two Economic Crises

4. NATIONAL GOVERNANCE TO STRENGTHEN THE COORDINATION OF
   EMPLOYMENT POLICIES ..................................................................................................... 37

      4.1       Increase in budget allocation for jobs ........................................................................... 37

      4.2       National governance to strengthen the coordination of employment
                policies ........................................................................................................................................ 38

      4.3       Polices to faciliate job creation ........................................................................................... 46

5. JOB CREATION: A BROADER APPROACH....................................................................... 51

      5.1       Tax reform aiming for job creation ................................................................................. 51

      5.2       Towards an employment-oriented welfare system .................................................. 53

      5.3       Development of new job-growth engines ..................................................................... 54

6. CONCLUDING REMARKS ...................................................................................................... 59

APPENDIX A ................................................................................................................................... 60

APPENDIX B ................................................................................................................................... 61

REFERENCES .................................................................................................................................. 63

x
List of Figures

Figure 2.1 Real GDP growth (percentage change) .............................................................................. 4

Figure 2.2 The two crisis impacts on Korea’s GDP growth by main components (percentage
           change) ....................................................................................................................................... 5

Figure 2.3 Changes in foreign exchange reserves and currency rates in Korea, 1995-2011 .. 6

Figure 2.4 Crisis effects on business activities...................................................................................... 7

Figure 2.5 Employment adjustment to GDP growth .......................................................................... 9

Figure 2.6 Quarterly Economically active participation rate and unemployment rate during
           two crisis periods, seasonally adjusted (per cent) ....................................................... 10

Figure 2.7 Change of real wage growth (percentage change from one year earlier)............. 11

Figure 2.8 Income inequality in Korea (measured in Gini coefficient) ........................................ 12

Figure 2.9 Changes in employment by different worker groups during the two crisis periods
           (percentage changes) ........................................................................................................... 14

Figure 2.10 Trends in youth unemployment and employment rates (per cent) ..................... 16

Figure 2.11 Change in the size and share of non-regular workers, August 2002-2011
            (million persons) ................................................................................................................... 17

Figure 4.1 Structure of the National Employment Strategy Meeting Task Force .................... 42

Figure 4.2 The employment impact assessment process ............................................................... 47

Figure 5.1 EITC structure according to number of children and earned income ..................... 53

                                                                                                                                                        xi
Republic of Korea: Development of National Employment Policies through Two Economic Crises

List of Tables

Table 3.1 Intensified employment services......................................................................................... 23

Table 3.2 Comparisons of the previous jobseeker training system and the Vocational Skills
           Development Account System ......................................................................................... 25

Table 4.1 Trends in the increase in jobs budget ................................................................................ 37

Table 4.2 Analysis of Employment Impact .......................................................................................... 48

Table 5.1 Legislation in Korea to promote the third sector ........................................................... 56

List of Boxes

Box 2.1 The 2009 social dialogue and the job-sharing efforts in Korea ....................................... 8

Box 2.2 Classification of “youth” in Korea ........................................................................................... 15

Box 3.1 Open Employment Society ....................................................................................................... 30

Box 4.1 Change in the name of Korea’s employment related ministry and strengthening of
        functions ........................................................................................................................................ 38

Box 4.2 National Employment Strategy 2020 for the Harmony of Growth, Employment and
        Welfare ........................................................................................................................................... 40

xii
ABBREVIATIONS

ASEAN    Association of Southeast Asian Nations
CGE      Computable General Equilibrium model
EITC     Earned Income Tax Credit
ETPL     Eligible Training Programme List
FGI      Focus Group Interview
FKTU     Federation of Korean Trade Unions
GDP      Gross domestic product
HR       Human resource
ILO      International Labour Organization
IMF      International Monetary Fund
KCTU     Korean Confederation of Trade Unions
KEF      Korea Employers Federation
KOICA    Korea International Cooperation Agency
KOTRA    Korea Trade- Investment Promotion Agency
KRW      South Korean Won
LaMAS    Labour Market Analysis System
LED      Light-emitting diode
MOEL     Ministry of Employment and Labor
MOL      Ministry of Labor
MOU      Memorandum of understanding
OECD     Organisation for Economic Co-operation and Development
PSM      Propensity Score Matching model
QWL      Quality of Working Life
SMEs     Small and medium sized enterprises
UNDP     United Nations Development Programme
USD      United States Dollar
WEO      World Economic Outlook
YES      Youth Employment Success

                                                                  xiii
EXECUTIVE SUMMARY

Korea achieved rapid economic growth and close-to-full employment for almost two
decades from the late 1960s. Upon the arrival of the era of globalization, growth
started to slow down in the 1990s. In this situation, the 1997 Asian financial crisis and
the recent global economic crisis hit the Korean economy hard like other countries.
Nevertheless, Korea succeeded in reducing the negative impact of the two financial
crises on its labour market and became one of the fastest recovery countries in the
world.

As two economic crises originated from two different sources and also differed in
scope and in the way they impact on the Korean labour market, the Korean
government developed different approaches and strategies to stabilize its labour
market and create jobs. After the Asian financial crisis, it established a labour market
system and infrastructure that could facilitate active labour market policies and
expanded social protection. On the other hand, during the global financial crisis, the
Korean government made job creation the top priority of all national policies,
developed a mechanism for aligning economic and social policies administered by
different ministries with employment policies, and set up a system for the evaluation
and assessment of policy implementation. Labour, management and government
engaged in social dialogue in the presence of two economic crises and agreed on
cooperating on various measures.

This report presents how the two different economic crises impacted on the Korean
economy and employment situation and which policies and institutions has been
developed to overcome the crises. It focuses on providing a historical narrative on the
employment policies and measures for coping with the global economic crisis and
national governance to strengthen the coordination of employment policies. However,
it does not try to analyse how and how much each policy or measure contributes to
improving the employment situation as most of them have been introduced recently.

An important point to bear in mind is that Korea, like other countries around the world,
faces the perennial challenge of striking the right balance between promoting
employment opportunities and protecting workers against economic volatility. This
issue is reflected in the case of ‘non-regular’ workers.2

2   Specific details on the characteristics of ‘non-regular’ workers can be found in Appendix B of this study.

                                                                                                           xv
Republic of Korea: Development of National Employment Policies through Two Economic Crises

Two economic crises and labour market evolution

In 1997, countries in East Asia including Korea suffered from foreign currency shortage
but the impact of the crisis was limited to the East Asian region. The economic crisis
which started from U.S. in 2008, on the other hand, had spread throughout the whole
world.

The patterns of the real GDP growth during two economic crises in Korea are quite
similar while the magnitude was different. Korea’s growth rate dropped to -5.7 per
cent in 1998 then soared to 10.7 per cent in 1999 but during the global economic crises
it slipped only to 0.3 per cent in 2009 and recovered to 6.2 per cent in the following
year.

The employment growth responded to the economic growth, showing distinctive
trends during the two economic crisis periods. During the 1997 Asian financial crisis,
the GDP growth rate hit bottom during the second quarter of 1998, dropping to -7.3
per cent, and subsequently recovered to show positive growth in the first quarter of
1999 at a rate of 6.4 per cent. Unlike the 1997 crisis, at the time of the 2008 global
economic crisis, fluctuations in the employment growth rate were relatively moderate.
Such a difference in the effects of the two crisis events can be attributed to the different
nature of the two crises and the corresponding response measures of the Korean
government. While a massive restructuring of the Korean labour market was
implemented during the 1997 crisis, the government initiated “job-sharing” efforts to
avoid large falls in employment in the wake of the 2008 financial crisis.

With the two economic crises impacting the country, the deeply embedded labour
market problems which had existed in Korea before 1997, such as the issue of youth
unemployment and non-regular workers, were aggravated and exposed. Through two
economic crises, young people experienced not only a drop in the number of jobs, but
also slow recovery in terms of regaining employment. Meanwhile, labour market
dualism in Korea began in the 1990s as companies started using non-regular workers
in the organization with an aim of securing labour flexibility in the face of rising global
competition. The number of non-regular workers in Korea, such as temporary workers,
continued to rise after the 1997 Asian financial crisis. Also, with the onset of the global
economic crisis of 2008, while jobs of regular workers were maintained, the process of
job destruction most affected non-regular employment.

Employment policy and institutional reform towards more active
measure

While the Employment Insurance System was adopted in 1995, it was expanded for
supporting active labour market policies during the process of overcoming the 1997
Asian financial crisis as follows.
 Beneficiaries of employment insurance were expanded from businesses with at least
  five employees to businesses with at least one employee.

xvi
Executive Summary

 The minimum unemployment allowance was also increased from 50 per cent to 70
  per cent of minimum wages.
 A variety of financial support systems were adopted to promote companies’
  maintenance of employees and new recruitments.
 A programme to provide out-placement service was also implemented.
 “Work-net” to provide speedy information to job seekers and employers were set up.

In order to implement active measures, administrative infrastructures were also
expanded. “Job Centers”, public employment service offices were established under the
Ministry of Labor in each region nationwide. Large numbers of staffs were also hired
for Job Centers, fulfilling tasks such as providing unemployed with vocational
counselling, job placement, vocational training services and allowance payment.

With the onset of the global economic crisis, the government set up more active and
intensified labour market polices such as (i) more systematic and intensified jobseeker
support programmes such as “Employment Success Package Programme”, (ii)
vocational training systems reflected the demands of trainees and companies such as
“Vocational Skills Development Account System”, and (iii) upgrades in “Work-Net”
information and increase in user convenience.

As the global economic crisis aggravated the youth employment problem, the Korean
government implemented the two “Making of Tomorrow for Youths” projects in 2010
and 2011, through which more job opportunities were given to young people through
the expansion of the private sector’s job creation ability.

The first “Making of Tomorrow for Youths” project presented two policies – expansion
of youth employment in the public sector, and assistance in transition from school to
workplace. Rather than attempting direct job creation as was done in the first project,
the second project is based on expanding education and career paths so that young
women and men can grow into talented human resources customized to the needs of
the labour market. Major programmes include providing venues for learning about the
workplace; improvement in employment service infrastructure to alleviate job
mismatching; increased decent job opportunities for graduates of regional schools;
increased start-ups for youth entrepreneurs; and` large scale recruitments by venture
companies.

With severe focus on educational background and an increase in university graduation
rates resulting in greater incidence of highly educated persons working at
unsatisfactory jobs and job mismatching has become a serious issue. In order to build a
society focused more on competency than on educational background, the government
has implemented “Open Employment Society” policy. It consists of various measures
such as increased job opportunities for high school graduates in the public and private
sectors, improved employment conditions, and intra-organization movement based
more on performance and ability rather than seniority.

As the size of temporary workers increased and as there has not been much
improvement in job quality after the Asian financial crisis due to reduction of regular

                                                                                    xvii
Republic of Korea: Development of National Employment Policies through Two Economic Crises

workers in the private sector, the Korean government has implemented various
measures to address this problem including legislations for protection, vocational
training programmes and conversion to unlimited contract-based position.

National governance for the coordination of employment policies

The employment policies implemented by the Korean government to cope with the
global economic crisis since 2008 were focused on the establishment and
implementation of job-focused economic and social policy, and employment policy
coordination mechanisms and policy monitoring and evaluation systems although the
government has also strengthened and intensified employment services as mentioned
earlier.

With a sluggish job market since the Asian financial crisis, there has been heightened
awareness in Korea that an approach dependent on ministry-specific employment
programmes alone is limited in solving the problem. It has become more necessary to
establish an employment strategy at the national level, which both covers the scope of
each of the ministries and the private sector and can be implemented in a consistent
manner. In the process of overcoming the global economic crisis, the Korean
government changed in the name of employment related ministry from Ministry of
Labor (MOL) to Ministry of Employment and Labor (MOEL) and strengthening of its
functions entitling MOEL to coordinate employment policies.

The government also established high level meetings to strengthen the coordination of
employment policies. A National Employment Strategy Meeting in which all the related
minsters and other heads of the central governmental authorities participate has been
established under the chairmanship of the President in Korea in order to deploy a
coherent government-wide national employment strategy. An Employment Policy
Coordination Meeting presided over by MOEL has also been set up with the purpose of
systematic monitoring and management of the policies.

Through this national governance system, the government has formulated “2020
National Employment Strategy” in 2010 and named the 2012 budget as the “Jobs
Budget,” with job creation placed as the top priority in budget appropriation.

In addition, a Public-Private Job Creation Consultative Committee has been established
jointly between the private sector and government in 2011, so that government may
build a cooperation system with the private sector that plays a leading role in job
creation. For customized measures in response to on-site needs, MOEL began
providing direct support at business sites by setting up On-site job+ Team, an on-site
group to support job creation, in 2011. Immediately under MOEL, “On-site job+ Team”
has been formed for onsite coordination, which means that government delegates can
visit workplaces in person to assess the difficulties that companies and jobseekers face
in regard to employment issues.

The Korean government has also developed the monitoring and evaluation system
which led economic and social policies and labour market policies to create more jobs

xviii
Executive Summary

after the Asian financial crisis.

First of all, the Korean government has established the employment impact assessment
system which seeks policy alternatives for job creation by conducting quantitative and
qualitative analyses not only on employment policies that have a direct impact on jobs,
but on important government policies and public projects in economy, industry and
welfare to ultimately support the creation of more jobs.

Another evaluation system in Korea is the “Local Job Creation Strategy Notice System”
which has been implemented by MOEL in 2010. Through the “Local Job Creation
Strategy Notice System,” the local government has been encouraged to establish its
own job creation targets catered to the characteristics and situation of the region.
Employment policies that can meet these objectives are presented to community
residents, and the central government conducts a review and assessment in order to
provide support.

The Korean government also conducts a review and assessment of each employment
insurance-related programme each year in order to make labour market policies more
efficient. MOEL used the results for improvement of the programmes. The Ministry of
Strategy and Finance is also notified of the results, which are reflected in the
assessment of the performance of the Employment Insurance Fund. The assessment of
fund management performance is reflected by having those programmes that receive a
rating of “less than satisfactory” subject to budget cuts the following year.

Economic and social policy orientation to job creation

The Korean government has made various efforts to create jobs, not only through
direct measures such as employment policy, but also through taxation, and various
social and industrial policies.

Tax reforms have been initiated in Korea in order to actively encourage job creation by
private companies. First, the Korean government has set up the “tax credit system for
investments in job creation,” which provides tax benefits based on newly created
employment, with the aim of encouraging investments for job creation. Secondly, for
SMEs that increase employment, the government has implemented a two-year tax
credit system for social insurance premiums. Thirdly, income tax for youth that are
employed by SMEs is totally exempted for up to three years. Fourthly, Earned Income
Tax Credit system has been revised to encourage work and family formation among
low income households.

The Korean government also reformed the welfare system to enhance incentives to
attract low income earners to the labour market. In order to overcome several
problems in the public assistance programmes which kept low income households
from getting out of the welfare system, the Korean government has been strengthening
the linkage between Job Centers and local government offices, expanding the
programmes for supporting self-reliance of public assistance recipients, and adopting a
“special allowance system.”

                                                                                    xix
Republic of Korea: Development of National Employment Policies through Two Economic Crises

Korea has decide to focus on the development of the green industries such as clean
energy (solar/wind energy) and recycling of waste resources and subsequent
conversion into energy as a driver of future economic growth and means of job
creation since 2009. MOEL has implemented the Green Job Creation Programme,
expanding vocational development capabilities for the nurturing of qualified workers
in green industries, and providing assistance for improvement in work environments
and industry structure.

Another attempt at job creation by the government was made through the
development of the ‘third sector’ such as social enterprises and cooperatives. The
Korean government viewed them as a model that could create profit and encourage
self-sustenance – a solution for the problem of low job growth and increase in demand
for social services. Subsequently, Korea enacted the “Social Enterprise Promotion Act”
to facilitate the growth of social enterprise and the “Basic Act on Cooperatives” in 2012
for the purpose of encouraging the growth of non-profit social cooperatives.

The Korean government adopted working hour reduction policy for the creation of
decent jobs and increase in quality of life. In 2010 the tripartite committee agreed to
work together to cut the total of annual working hours to 1,800 hours from currently
more than 2,100 hours by 2020. Based on the tripartite consultation, the government
established a “Comprehensive Plan to Reduce Extended Working Hours,” which was
put into action from 2011.

The ILO’s global employment strategy and the Korean experiences

The global economic crisis which started in 2008 has swept across the world, leaving a
vast majority of countries with serious economic downturn and employment recession.
Some European economies are struggling to chase three targets at once - adopting belt-
tightening measures to cope with mounting sovereign debt that accumulated during
the crisis while achieving an economic recovery and overcoming the employment crisis.

Addressing the issue of job shortages has become the top priority for both developed
and developing economies. The Global Employment Trends published by the ILO on 24
January 2012 says that the global unemployment rate, which currently stands at about
6 per cent, will not go down between now and 2016. Also notably, in 2011, 74.8 million
youth or 12.7 per cent were unemployed, which remains a full percentage point higher
than the pre-crisis level of 2007.

The ILO has advocated global strategies for overcoming the jobs crisis. As a result, the
Declaration on Social Justice for a Fair Globalisation (2008), the Global Jobs Pact (2009)
and the Resolution of 99th International Labour Conference (2010) were adopted. The
focus of these global agreements is, in essence, on establishing employment-friendly
macroeconomic systems so as to put full and productive employment and decent work
at the heart of the national policies. The recent Korean policy experience to cope with
the global economic crisis can be viewed as a country-specific illustration that is in
accord with the core demand of those global agreements.

xx
INTRODUCTION
                                                                                  1
The global economic crisis which started in 2008 has swept across the world, leaving a
vast majority of countries with serious economic downturn and employment recession.
Some European economies are struggling to cope with multiple challenges - adopting
belt-tightening measures to cope with mounting sovereign debt that accumulated
during the crisis while achieving an economic recovery and overcoming the
employment crisis.

Addressing the issue of job shortages has become the top priority for both developed
and developing economies. The Global Employment Trends published by the ILO on 24
January 2012 says that the global unemployment rate, which currently stands at about
6 per cent, will not go down between now and 2016. Also notably, in 2011, 74.8 million
youth or 12.7 per cent were unemployed, which remains a full percentage point higher
than the pre-crisis level of 2007. Discussion has been on within the ILO to set global
strategies for overcoming the jobs crisis. As a result, the Declaration on Social Justice
for a Fair Globalisation (2008), the Global Jobs Pact (2009) and the Resolution of 99th
International Labour Conference (2010) were adopted. The focus of these global
agreements is, in essence, on establishing employment-friendly macroeconomic
systems so as “to place full and productive employment and decent work at the center
of economic and social policies.”

Korea achieved rapid economic growth and close-to-full employment for almost two
decades from late 1960s. However, growth started to slow down in the 1990s, with
problems such as labour market mismatch surfacing. The 1997 Asian financial crisis
and the recent global economic crisis caused dire employment situation. Nevertheless,
Korea succeeded in minimizing negative impact of the global financial crisis on its
labour market and became one of the fastest recovery countries in the world.

The two crises had similar consequences - economic downturn and decline in
employment opportunities. However, with further scrutiny, distinctive characteristics
such as their cause, nature and impact on the labour market can be found. Accordingly,
the Korean government responded differently to each of the crises. In 1997, Korea
received a bailout package from the IMF to cope with the liquidity crisis stemming
from the foreign currency crunch. The shockwave was enormous. The economy started
to backslide and mass layoffs were prevalent, generating great economic and social
suffering. However, the crisis was confined to only a handful of Asian countries and the
main culprit was short foreign currency liquidity, thus having limited ripple effects on

                                                                                       1
Republic of Korea: Development of National Employment Policies through Two Economic Crises

the real economy. That is why the crisis sent out a huge shockwave across the economy
and the labour market at the beginning but with little aftershock later on, enabling the
country to make a fast rebound. By contrast, the global financial crisis that started from
the US spread to the rest of the world in 2008, and Korea was no exception. Already
suffering from low growth and low employment, Korea was hit hard by the external
shocks, falling deeper into recession and unemployment. However, Korea could lift
itself from the crisis earlier because lessons learned in the previous crisis helped the
country respond to the shocks. The boom in the emerging markets like China was a
boon to Korea which lost its traditional export markets like the US and Europe during
the crisis.

Korea developed employment policies in the midst of two different crises, taking into
account the nature and gravity of the shocks. After the Asian financial crisis, it
established a labour market system and infrastructure that could facilitate active
labour market policies and expanded social safety nets. What is particularly
noteworthy is that the Korean government during the global financial crisis made job
creation the top priority of all national policies, developed a mechanism for aligning
economic and social policies administered by different ministries with employment
policies, and set up a system for the evaluation and assessment of policy
implementation.

This report focuses on introducing the employment policies that Korea developed in
the course of overcoming two economic crises without evaluating their impact on the
labour market as most of them are new policies whose performances are too early to
be assessed.

2
TWO ECONOMIC CRISES AND LABOUR
MARKET EVOLUTION                                                                2
The purpose of this section is to analyse Korea’s macro-economic and labour market
situation as a result of the two major economic crises. It conducts an analysis of the
pattern of economic decline and recovery in both cases, the general transformation and
recovery of the labour markets, and how the existing deep-rooted issues of the labour
market were altered in the midst of the economic crisis. This will help identify the
nature of the two economic crises that impacted Korea and the repercussions on its
labour market.

2.1    Comparison of the two economic crises in magnitude and
       transmission mechanisms in Korea

The 1997 Asian financial crisis and the 2008 global economic crisis originated from
two different sources and also differed in scope and in the way they spread to the
Korean economy. The Asian financial crisis was regional; it occurred as countries in
East Asia such as Korea, Indonesia, Malaysia and Thailand had to request a bailout from
the International Monetary Fund (IMF) due to foreign currency shortage. It did not
impact other major countries such as the United States and European countries outside
of the East Asian region. However, the economic crisis in 2008 was global in nature,
starting in the United States and spreading throughout the whole world, including
Europe and Asia. An export-dependent economy such as Korea’s responds sensitively
to changing factors in overseas markets, and thus the impact on the Korean economy
was extensive.

With the Asian financial crisis of 1997, the high economic growth rates Korea and
many East Asian countries had maintained dropped considerably. However, during the
same period, the economic growth rates of the United States and Europe continued to
climb, displaying irrelevance to the East Asian crisis. Korea’s economic growth rate
dropped from 5.8 per cent in 1997 to -5.7 per cent in 1998, but in the following year,
the economy recorded a growth rate of 10.7 per cent, and maintained the upward
trend with an 8.8 per cent growth rate in 2000. When comparing with other countries
in the East Asian region such as Japan and the major member countries of the
Association of Southeast Asian Nations (ASEAN) that similarly suffered from the
financial crisis, Korea’s recovery was relatively fast (Figure 2.1).

                                                                                     3
Republic of Korea: Development of National Employment Policies through Two Economic Crises

The rapid economic recovery of Korea can also be witnessed during the 2008 global
economic crisis. During this period, the growth rates of major economies of the world,
such as European countries, Japan and the United States (with the exception of China),
dropped drastically. The economic growth rates of Japan, the United States and EU
countries began to fall from 2008, recording negative growth rates in 2009 and
recovering somewhat in 2010. Korea’s economic growth rate dropped from 5.1 per
cent in 2007, to 2.3 per cent in 2008, and 0.3 per cent in 2009. On a quarterly basis,
Korea recorded a negative growth rate of -3.3 per cent in the fourth quarter of 2008,
which continued into the second quarter of 2009. In three quarters, it recovered to 0.3
per cent in 2009, and did not show a negative average annual growth rate unlike other
countries. The country’s growth rate reached 6.2 per cent in 2010, which was higher
than that of the United States and European countries.

Figure 2.1 Real GDP growth (percentage change)

15                         ASIAN                                                           GLOBAL
                         FINANCIAL                                                        ECONOMIC
                           CRISIS                                                           CRISIS
10

    5

    0

                                                  World                  ASEAN-5
 -5                                               EU-27                  China
                                                  Japan                  Korea
                                                  United States
-10
        1995   1996   1997   1998   1999   2000   2001            2005    2006   2007   2008   2009   2010   2011

Note: ASEAN-5 refers to Indonesia, Malaysia, Philippines, Thailand, and Vietnam.
Source: IMF World Economic Outlook (WEO) database, September 2011; Eurostat database.

The Asian financial crisis of 1997 was limited to the East Asian region, and Korea’s
main export markets, such as the United States, were not greatly impacted. With
relatively low exchange rates, exports recorded growth of more than 10 per cent
during the crisis period, and the basis for export-led economic growth was maintained.
During the Asian financial crisis, there was conspicuous reduction in investments due
to the series of bankruptcies of major companies and instability in the financial
markets. Moreover, private consumption was stagnant, which resulted in a great
decrease in the importation of goods. However, immediately after the end of the crisis,
the economy recovered with the Korean government’s efforts to attract foreign direct
investment (FDI), large-scale restructuring, and increase in exports. These efforts in

4
2. Two Economic Crises and Labour Market Evolution

turn led to renewed investments, restored domestic demand, and growth of private
consumption and imports (Figure 2.2).

While the cause of the 1997 economic crisis was both an internal and external problem,
that of the 2008 economic crisis was mostly an external problem. With the onset of the
global economic crisis and widespread recession, the first symptom that appeared as a
warning to the Korean economy was the drop in exports. Under such circumstances,
private consumption shrunk, and the Korean government set about to substitute the
fall in private consumption with government expenditure by pursuing job-creation
projects and implementing various policies. As the economy showed signs of slowing,
investment dropped again, and the economy recorded a negative growth rate. The
global recession resulted in negative growth rates of both exports and imports. Korea’s
trade with its major partners, the United States and Japan, became stagnant. However,
as the economies of China and developing economies were able to stay sound, trade
with these nations helped Korea’s economy recover, and ongoing government
expenditure reinvigorated domestic demand.

Figure 2.2 The two crisis impacts on Korea’s GDP growth by main components
(percentage change)
  15
                        1998    2009
  10

   5

   0

  -5

 -10

 -15

 -20

 -25
            Private         Government          Gross capital     Exports of goods   Imports of goods
         consumption        consumption          formation          and services       and services

Note:   For more detailed information, see APPENDIX A

Source: Bank of Korea, Economic Statistics System.

Changes in the currency rate and foreign exchange reserve have a considerable impact
on export-dependent economies such as Korea. During the 1997 Asian financial crisis,
Korea had to request a bailout from the IMF due to a lack of foreign currency. Since
then, the country has consistently raised its level of foreign currency holdings, and
from 2005, holds more than KRW 200 billion. With the onset of the global financial
crisis, the Korean government depleted its foreign exchange reserves after stabilizing
the won-dollar exchange rate. Thus its foreign exchange reserves went down for some
time, but recovered soon after to maintain USD 315.8 billion as of February 2012

                                                                                                        5
Republic of Korea: Development of National Employment Policies through Two Economic Crises

(Figure 2.3). This is the eighth highest level in the world, after China (USD 3,236 billion),
Japan (USD 1,302 billion), Saudi Arabia (USD 556 billion), Russia (USD 505 billion),
Taiwan (USD 418 billion), Brazil (USD 356 billion), and Switzerland (USD 316 billion).3

Figure 2.3 Changes in foreign exchange reserves and currency rates in Korea, 1995-2011
400                                                                                             200
                                Foreign exchange reserves
350                             (left axis, billion USD)
                                Korean Won to USD exchange rates
300                             (right axis, percentage change from previous year, 1995=100)    175

250

200                                                                                             150

150

100                                                                                             125

    50

     0                                                                                          100
         1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Bank of Korea, Economic Statistics System.

The nature of the impact the two economic crises had on Korea’s real economy,
including the financial situation of companies, in particular small and medium sized
enterprises (SMEs), was quite different. The percentage of dishonoured bills and
bankrupt companies rose greatly during the crisis period of 1997. The percentage of
dishonoured bills, which was 14 per cent in 1996, rose to 40 per cent and 38 per cent
in 1997 and 1998 respectively, as foreign capital fled out of the country with the
advent of the crisis. This meant that almost half of circulated bill amounts were not
being paid, a sign of corporate financial distress. With the end of the crisis, the
economy stabilized, as did the percentage of dishonoured bills, which stayed within 10
per cent. When the 2008 global economic crisis occurred, the percentage of
dishonoured bills in Korea rose from 2 per cent to 3 per cent, which showed that the
financial situation of businesses was much more stable than it had been during the
Asian financial crisis (Figure 2.4).

3 IMF: International reserves and foreign currency liquidity, 2012,
http://www.imf.org/external/np/sta/ir/IRProcessWeb/colist.aspx (accessed 15 Mar. 2012); and CIA:
World factbook, 2011, https://www.cia.gov/library/publications/the-world-
factbook/rankorder/2188rank.html (accessed 15 Mar. 2012).

6
2. Two Economic Crises and Labour Market Evolution

Figure 2.4 Crisis effects on business activities
50                                                                                                  25
                                           Number of companies that issued dishonoured bills
                 40%                       (right axis, thousands)
40                     38%                                                                          20
                                           Dishonoured ratio
                                           (left axis, percentage)
30                                                                                                  15

20                                                                                                  10

           14%
10                                                                                                   5
                                                                                    3%         2%

 0                                                                                                   0
      1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Bank of Korea, Economic Statistics System.

Other than the rapid economic recovery, the impact the two economic crises had on the
Korean economy was quite different in regard to the foreign exchange reserve,
currency rate, imports and exports, and bankruptcy rates. The 1997 Asian financial
crisis was an event that had a direct and powerful impact on the Korean economy. The
general economic situation of Korea was unstable, with high bankruptcy rates and a
greatly diminished foreign exchange reserve. It was only able to recover through the
increase in exports as a result of low exchange rates, and the strenuous efforts of
government and companies to restructure the economy. The 2008 global economic
crisis led to a drop in Korea’s short term economic growth and rise in exchange rates,
but pre-emptive coping measures of the financial authority, consistent growth in
exports, financial strength of companies, and other factors enabled a quick economic
recovery.

2.2     Labour market impact of the economic crises in Korea

The macroeconomic analysis reveals the different nature of the two economic crises
that impacted the Korean economy. The same holds true for the repercussions on
Korea’s labour market.

The employment growth responded to the economic growth, showing distinctive
trends during the two economic crisis periods. During the 1997 Asian financial crisis,
both the GDP and employment growth rate of Korea in the first quarter of 1998 were
negative. The GDP growth rate hit bottom during the second quarter of 1998, dropping
to -7.3 per cent, and subsequently recovered to show positive growth in the first
quarter of 1999 at a rate of 6.4 per cent. The employment growth rate lagged one
quarter behind the economic growth rate, recording an all-time low of -7.0 per cent in

                                                                                                     7
Republic of Korea: Development of National Employment Policies through Two Economic Crises

the third quarter of 1998, and returned to a positive growth rate of 0.9 per cent in 1999
(Panel A of Figure 2.5).

Unlike the 1997 crisis, at the time of the 2008 global economic crisis, fluctuations in the
employment growth rate were relatively moderate. Employment was not impacted as
much as was the overall economy, and the growth rate of employment recovered
quickly. The GDP growth rate began to drop from the fourth quarter of 2008,
converting to a positive growth rate three quarters later at the third quarter of 2009.
The employment growth rate recorded a negative growth rate of -0.6 per cent over the
period of the first and second quarters of 2009 and converted to positive from the third
quarter of 2009.

Such a difference in the effects of the two crisis events can be attributed to the different
nature of the two crises and the corresponding response measures of the Korean
government. During the 1997 crisis, a massive restructuring of the Korean labour
market was implemented in line with stringent IMF demands. This led to a drastic
reduction in employment, mostly of regular workers at large companies. During the
2008 financial crisis, the government initiated “job-sharing” efforts to avoid large falls
in the employment. These efforts were centred on maintaining jobs by cutting working
hours and wages and adopting flexible working conditions rather than mass lay-off
(see Box 2.1).

Box 2.1 The 2009 social dialogue and the job-sharing efforts in Korea

It was agreed upon by labour and management that through “job-sharing,” management
would limit lay-offs and help workers maintain their employment status through the sharing of
duties. In 2009, immediately after the advent of the 2008 global financial crisis, an agreement
was reached between labour and management to put this into action. In February 2009, the
Federation of Korean Trade Unions (FKTU) and the Korea Employers Federation (KEF) formed
an emergency committee consisting of representatives of labour, employers and civil society
sides and the government for the purpose of conceiving measures to overcome the economic
crisis. Through official meetings and various discussions, the committee adopted an
“Agreement among labour, employers, civil society and government to overcome the economic
crisis.” Through this agreement, workers and employers agreed to share and maintain jobs
through freezes, returns, and cuts in wages, as well as restrictions in lay-offs, and to share the
pain through increased concessions and negotiations between labour and management at the
corporate, regional and national levels.

To overcome the crisis, the government pursued various measures, such as increasing the
financial assistance to companies that maintain employees by initiating temporary shutdowns
or holding training sessions rather than laying off workers. The level of assistance for
temporary shutdowns of operations and suspensions of workers was increased from two-thirds
to three-quarters of paid allowance (one-half to two-thirds for large companies).

Panel B of Figure 2.5 shows a drastic fall in the employment growth of advanced
countries as caused by the global economic crisis of 2008. In the United States, Japan
and most countries in Europe, as the economic growth rates dropped, employment

8
2. Two Economic Crises and Labour Market Evolution

growth rates fell simultaneously. In the case of Korea, however, with the rapid
economic recovery and tripartite constituents’ cooperation for overcoming the crisis,
there was less variance in the economic growth rate than there was in the major
advanced economies, and the fall in employment was less extensive.

Figure 2.5 Employment adjustment to GDP growth

Panel A: Quarterly GDP and employment growth rate in Korea (per cent)
15

                                   ASIAN                                                                         GLOBAL
10                               FINANCIAL                                                                      ECONOMIC
                                   CRISIS                                                                         CRISIS

 5

 0

 -5                                                                      GDP
                                                                         Employment
-10
       Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1                                             Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
      1996 1997 1997 1998 1998 1999 1999 2000 2000 2001                         2007 2007 2008 2008 2009 2009 2010 2010 2011 2011

Panel B: GDP and employment in selected G-20 countries, change in 2009 compared to 2008 (per
cent)
 6
                                                                                                           GDP             Employment
 4

 2

 0

-2

-4

-6

-8
                                                                            Korea

                                                                                                                           Japan
                                                                                                                   Italy
                     Australia

                                                      Mexico
                                    Brazil

                                                               Germany

                                                                                                                                           United States
         Indonesia

                                                                             Korea
                                             Turkey

                                                                                                                                   EU-27
                                                                                      France

                                                                                               United Kingdom

Source: Bank of Korea, Economic Statistics System; ILO, LABORSTA; IMF, World Economic Outlook
        (WEO) database, September 2011; Eurostat database; Statistics Korea.

Trends in the economically active participation rate and unemployment rate also
reveal the different impact of the two economic crises on Korea’s labour market. The
unemployment rate, which remained in the lower 2 per cent before the 1997 crisis,
climbed to 4.9 per cent in the first quarter of 1998 due to the crisis’ impact,

                                                                                                                                                           9
Republic of Korea: Development of National Employment Policies through Two Economic Crises

subsequently rising to as high as 8.4 per cent in the fourth quarter of 1998. It went on
to decrease gradually, but recorded 3.7 per cent in the fourth quarter of 2001, which
did not meet the pre-crisis levels. However, the unemployment rate during the 2008
global economic crisis did not respond as quickly as did that of the 1997 crisis. In the
second quarter of 2009, the unemployment rate grew to 3.9 per cent, but this was a
considerably stable level when compared to the trough of the 1997 crisis. Thereafter,
due to a rise in the number of jobseekers as the economy entered into recovery stage
and an increase in applications with the implementation of job creation projects
supported by the government in the first quarter of 2010, the unemployment rate rose
to 4.3 per cent,. In the fourth quarter of 2011, the unemployment rate dropped back to
the pre-crisis level of 3.1 per cent (Figure 2.6).

Also, with the Asian financial crisis, the economically active participation rate fell
greatly as a result of massive lay-offs. The participation rate dropped from 63.1 per
cent in the first quarter of 1997 to as low as 60.2 per cent in the fourth quarter of 1998
due to the crisis. During the global economic crisis of 2008, the economic participation
rate fell not as drastically as it did around the 1997 crisis (due to job-holding measures)
and showed the pattern demonstrated in the figure below.

Figure 2.6 Quarterly Economically active participation rate and unemployment rate
during two crisis periods, seasonally adjusted (per cent)
64                                                                                                                10

                                                                                                                  9
                                             Participation rate (left axis)
63                                                                                                                8
                                             Unemployment rate (right axis)      GLOBAL
                                                                                                                  7
                                                                                ECONOMIC
62                                                                                CRISIS                          6
                         ASIAN
                       FINANCIAL                                                                                  5
                         CRISIS
61                                                                                                                4

                                                                                                                  3

60                                                                                                                2

                                                                                                                  1

59                                                                                                                0
      Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1                            Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
     1996 1997 1997 1998 1998 1999 1999 2000 2000 2001        2007 2007 2008 2008 2009 2009 2010 2010 2011 2011

Note:   The seasonally adjusted quarterly data were computed for this study by using the ARIMA X-12
        as seasonally adjusted data for the economically active participation rate and the unemployment
        rate in the Statistics Korea are available only after year 2000.
Source: Statistics Korea, Economically Active Population Survey.

There seems to be a difference in the way firms responded to the macroeconomic
shocks that resulted from the crises. During the 1997 financial crisis, together with a
fall in employment resulting from labour restructuring, there was an immediate drop
in real income, which was due to a reduction in overtime pay and fringe benefits.
However, during the 2008 global economic crisis, while there was no considerable fall

10
2. Two Economic Crises and Labour Market Evolution

in employment due to efforts to maintain jobs through cutting working hours and
sharing of duties, the fall in real income was relatively less steep (Figure 2.7).

Figure 2.7 Change of real wage growth (percentage change from one year earlier)

    15

    10

    5

    0

    -5

-10

-15
          Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1                        Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
         1996 1997 1997 1998 1998 1999 1999 2000 2000 2001    2007 2007 2008 2008 2009 2009 2010 2010 2011 2011
Source: Ministry of Employment and Labor, Labour Force Survey at Establishments

Income disparity4 among the Korean urban households has widened dramatically since
the 1997 financial crisis and has not yet dropped to the pre-crisis level. However,
during the 2008 global economic crisis, income disparity was not exacerbated; there
was even a small reduction. The 1997 financial crisis affected low-income households
disproportionately. Moreover, the burden born by low-income households did not
seem to be lifted with economic recovery, at least in relative terms, because their
income grew less quickly than did those of high-income households (Panel A of Figure
2.8).

The widening income inequality is not specific to Korea. When making a global
comparison of the Gini coefficient, mainly with the G20 and European countries,
Korea’s is lower than that of most countries, with the exception of some European
countries (Panel B of Figure 2.8).

The East Asian financial crisis was associated with massive labour restructuring
(consisting mostly of regular workers) that led to a historically high unemployment
rate. However, in the 2008 global financial crisis, though the economy did slow down,
jobs were maintained through various measures. Companies that had to resort to
massive lay-offs with the crisis in 1997 experienced difficulty in hiring high quality
human resources as the economy entered into cyclical recovery. As a result, they
refrained from initiating major changes in their human resources in the wake of the
crisis of 2008. The government also provided various measures of policy support to
prevent chaos in the labour market, and its intervention seemed to have a positive
impact on the job market.

4   Measured by the Gini coefficient.

                                                                                                                  11
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